From Boom to Bust(ing up big companies)

Eliot Spitzer demonstrates over at Slate why I was so grieved when we lost him to libido. Given the importance of financial markets, it seemed to me that his savvy about them was incredibly valuable to good government.

Spitzer says that the "too big to fail" model for banks is the problem and that rather than prop them up with subsidies, we ought to let them fragment into smaller pieces.

Yesterday, I had an exchange with my cousin Scott and he suggested the same thing about the auto industry. Let the little start ups offering new and innovative (and typically more green) designs take market share from the Big 3. (Look at this little Aptera, made by a company here in San Diego County, that gets 300 mpg, for instance.)

For autos and finance the future is uncertain. What kind of models will work best? What kind of financial products are innovative and which are merely reckless? What kind of cars will work to alleviate congestion and pollution? And even we could define these products, what kind of company could best provide the whole package (from employees to prices to support infrastructure) to best deliver those products?

Given so much is uncertain, it is best to have lots of experiments running right now. The Big 3 and the big banks could, in theory, run those experiments, letting various divisions and groups take their shot at creating a new future. But one of the many problems with CEOs making so much money is that they seemingly feel obligated to earn it. They review and judge the various plans from within the company, effectively running everything through the same filter - making the company one really big test of one theory rather than lots of small tests of many theories.

Given the financial crisis, Obama has been compared to FDR. What if, instead, the better model is the brash Teddy Roosevelt who broke up big companies, forcing competition into industries that made a few rich but did little for the rest of the country? He could do worse than accept this argument from Spitzer:

But even more important, from a structural perspective, our dependence on [financial institutions] of this size ensured that we would fall prey to a "too big to fail" argument in favor of bailouts.

Two responses are possible: One is to accept the need for gigantic financial institutions and the impossibility of failure—and hence the reality of explicit government guarantees, such as Fannie and Freddie now have—but then to regulate the entities so heavily that they essentially become extensions of the government. To do so could risk the nimbleness we want from economic actors.

The better policy is to return to an era of vibrant competition among multiple, smaller entities—none so essential to the entire structure that it is indispensable.

The concentration of power—political as well as economic—that resided in these few institutions has made it impossible so far for this crisis to be used as an evolutionary step in confronting the true economic issues before us. But imagine if instead of merging more and more banks together, we had broken them apart and forced them to compete in a genuine manner. Or, alternatively, imagine if we had never placed ourselves in a position in which so many institutions were too big to fail. The bailouts might have been unnecessary.